Time To Buy This Giant On The Dip?

On November 1st, shares of prestige makeup and cosmetics leader Estée Lauder (NYSE:EL) fell 19 percent in a single trading session. This dramatic decline added to what had already been a difficult year for shareholders.

EL shares are now down 55 percent YTD, making many shareholders wonder if and when a recovery could begin for the cosmetics giant. We dive deep down the rabbit hole to find out.

Why Did Estée Lauder Stock Go Down?

The primary driving force behind EL’s sudden decline was the simultaneous release of its Q4 and FY2023 results.

For the full year, organic net sales dropped 10 percent to $15.91 billion. Earnings per share, meanwhile, fell by a much more dramatic 57 percent to reach $2.79. It’s worth noting, though, that the company did achieve year-over-year net sales growth for Q4.

Much of the weakness over the past year has been the result of much slower growth in the Chinese market than expected.

Travel retail, which previously accounted for about 40 percent of the company’s Chinese business, has been slow to recover from the 2020-21 era.

While Estée Lauder is now banking on consumers buying more cosmetics at home rather than while traveling, the company’s difficulties over the past year highlight the weakness of the Asian market.

Not all of the difficulties, however, were tied to weaker Chinese sales. Sustained inflation in the United States, for instance, caused retailers to pare back inventories of Estée Lauder products.

A stronger dollar also placed pressure on the company’s sales abroad, causing slower-than-expected improvements in overall business performance.

EL Analyst Ratings

In the aftermath of the most recent earnings report, several institutional investors have trimmed their price target for EL shares.

Even so, the median analyst price target of $134 is still 20.8 percent above the most recent price of $110.96.

The consensus rating for the stock is currently a hold, with 17 of the 31 analysts covering EL offering that rating.

Is Estee Lauder Stock Undervalued?

Despite already having fallen to multiyear lows, Estée Lauder shares still show signs of overvaluation.

To begin with, EL currently trades at 39 times its projected forward earnings, placing it well above the broader market. Just as concerning is the stock’s price-to-earnings-growth ratio of 2.3, which strongly suggests that EL trades at an excessive premium to its expected growth.

Investors may also find Estée Lauder’s financial standing troubling in light of its recent performance. With a debt-to-equity ratio of 1.3, the company is carrying more debt than would generally be considered healthy.

In combination with rising interest rates, this high debt load has also saddled the company with much higher interest expenses. For the fiscal year ending on June 30th, Estée Lauder paid $255 million in interest, up 53 percent from the previous fiscal year.

Overall, Estée Lauder shares are likely not undervalued at current prices. If anything, the stock’s current ratios tend to suggest overvaluation. It’s important to note, however, that a rebound in global economic growth could alter the value outlook for EL significantly.

Will Estée Lauder Stock Recover?

With management citing slow growth in the Chinese market as a key reason for its downgraded sales and earnings, the question of Estée Lauder’s recovery may be tightly linked to macroeconomic conditions in China.

Will Estée Lauder stock recover? Estée Lauder will struggle to recover due to a combination of inflation, a slowdown in China, and a high debt burden.

With an ongoing property value crisis, lower consumer spending and a stumbling recovery from COVID-19, the Chinese economy is expected to grow just 4.2 percent in 2024. This is well below the 5.0 percent projected for the full year of 2023. Such a substantial slowdown will likely bode ill for Estée Lauder.

The global prestige cosmetics market may also be in for a period of slower growth ahead. Total global revenues from this market are expected to grow at a compounded annual rate of just 4.35 percent through 2028. This slower growth could place downward pressure on brands like Estée Lauder and hamper shareholder returns.

Finally, the inflationary pressures that caused Estée Lauder’s domestic troubles may persist into 2024. Although global inflation has cooled, it is projected to remain above 5 percent into next year. This could further reduce consumer demand for expensive cosmetics and cause additional difficulties for Estée Lauder as it attempts to regain some of the ground it has lost.

Taking this and its already fairly high valuation into account, a full recovery in EL shares does not seem to be on the immediate horizon. The company’s fundamentals will likely improve if and when the global economy begins to grow more quickly, but shareholders could have a long and uncertain wait for significant returns.

Estée Lauder: Buy or Sell?

While Estée Lauder is an unquestionable bastion of the prestige cosmetics industry, its stock does not appear particularly appealing at the moment.

High debt, slow growth in key Asian markets and a generally lackluster economic outlook have all combined to pile heavy losses on EL shareholders over the past year. Even with a return to sales growth in Q4, there is still a great deal of uncertainty surrounding the company’s ability to grow earnings going forward.

Another cause for concern is Estée Lauder’s seemingly unsustainable dividend. At 2.38 percent, the distribution itself is not particularly high. The payout ratio, however, is nearly 175 percent of net income.

Without considerable earnings growth, Estée Lauder will struggle to maintain its dividend and may have to cut its quarterly distributions. As such, the stock could prove unduly risky for income-oriented investors.

Overall, Estée Lauder appears to be a moderate sell at the moment. Some shareholders may prefer to hold onto their shares in hopes of better prices next year, but the macroeconomic pressures that have caused the company’s woes may or may not abate in 2024. With shares having already fallen so far, investors may want to consider cutting their losses and looking for better growth opportunities elsewhere.

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The author has no position in any of the stocks mentioned. Financhill has a disclosure policy. This post may contain affiliate links or links from our sponsors.